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Airline Stocks Fail to Shine in Friday's Trading: Here's Why
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Players in the Zacks Airline industry did not perform well on the bourses on Friday, Jan 12, 2024. Industry heavyweights like Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) , American Airlines (AAL - Free Report) and Southwest Airlines (LUV - Free Report) declined 9%,10.6%, 9.5% and 4.3%, respectively, from Thursday’s closing price. With major constituents moving south, the NYSE ARCA Airline index fell consequently, ending Friday’s session at $62.29, down 4.4%.
Delta kickstarted the fourth-quarter 2023 earnings season for airlines on Jan 12. The Atlanta-based airline behemoth reported better-than-expected revenues and earnings per share in the December quarter. Strong holiday air travel demand aided results. However, high labor costs resulted in the bottom line shrinking 13.5%.Salaries and related costs rose 23% to $3,769 million. The increase was due to higher wages arising from the contract with pilots that was ratified in March 2023. Another disappointing aspect of the quarterly earnings report was the 24% year-over-year decline in cargo revenue.
More than the above disappointments, it was the trimming of the 2024 earnings guidance due to supply-chain woes and economic uncertainty, which spooked investors. Management now expects 2024 adjusted earnings in the range of $6-$7 (projected to be above $7 previously). Supply chain disruptions are leading to high maintenance costs, which increased 13% and 23% in fourth-quarter 2023 and full-year 2023, respectively. Since DAL’s results generally serve as a harbinger of what to expect across the industry, its disappointing guidance and the resultant stock price depreciation caused other airlines to shed value on Friday.
DAL’s earnings guidance apart, the northward movement in oil price on Friday was a headwind for airline stocks, leading to their price depreciation. Oil price climbed nearly 1% on Friday to settle at $72.68 a barrel. The airstrikes carried out by the United States and the UK against Houthi targets in Yemen, in response to recent ship attacks in the Red Sea, resulted in an uptick in oil prices.
High Fuel & Labor Costs: A Bane for Airlines
The northward movement in oil prices is not a welcome development for airline stocks. This is because expenses on fuel represent a significant input cost for airlines. Therefore, an increase in fuel costs hurts bottom-line growth.
For example, oil price increased in third-quarter 2023, primarily due to the extension of production cut by Saudi Arabia and Russia through 2023-end. At UAL, average fuel price increased 10.3% sequentially in the September quarter. UAL expects the metric to be $3.28 in fourth-quarter 2023. UAL will release its fourth-quarter results on Jan 22.
At American Airlines, average fuel price increased 11% sequentially in third-quarter 2023 to $2.91 per gallon. The metric is expected to be in the $3.01-$3.11 band in fourth-quarter 2023. AAL will release its fourth-quarter results on Jan 25.
At the Dallas-based Southwest Airlines, economic fuel price per gallon in third-quarter 2023 was $2.78, up 6.9% from second-quarter 2023 levels. LUV forecasts fourth-quarter economic fuel cost per gallon in the $3 to $3.1 band. Like AAL, LUV too will release its fourth-quarter results on Jan 25.
Like Delta, labor costs are likely to have been high for other airlines too, in turn hurting bottom-line growth. With U.S. airlines grappling with labor shortage in the post-COVID-19 high-demand scenario, the bargaining power of various labor groups has naturally increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs.
For example, in August 2023, American Airlines pilots, represented by Allied Pilots Association, approved a four-year deal pertaining to wage increases. The approval makes AAL’s pilots eligible for an immediate pay raise in excess of 21% on average. Also, the deal includes provisions aimed at improving pilots’ quality of life. In September 2023, United Airlines’ pilot union ratified a $10 billion contract to increase their pay up to 40.2% over the four-year duration of the contract.
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Airline Stocks Fail to Shine in Friday's Trading: Here's Why
Players in the Zacks Airline industry did not perform well on the bourses on Friday, Jan 12, 2024. Industry heavyweights like Delta Air Lines (DAL - Free Report) , United Airlines (UAL - Free Report) , American Airlines (AAL - Free Report) and Southwest Airlines (LUV - Free Report) declined 9%,10.6%, 9.5% and 4.3%, respectively, from Thursday’s closing price. With major constituents moving south, the NYSE ARCA Airline index fell consequently, ending Friday’s session at $62.29, down 4.4%.
Of the abovementioned stocks, American Airlines presently carries a Zacks Rank #2 (Buy) while the rest currently carry a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What’s Behind the Dismal Show on Friday?
Delta kickstarted the fourth-quarter 2023 earnings season for airlines on Jan 12. The Atlanta-based airline behemoth reported better-than-expected revenues and earnings per share in the December quarter. Strong holiday air travel demand aided results. However, high labor costs resulted in the bottom line shrinking 13.5%.Salaries and related costs rose 23% to $3,769 million. The increase was due to higher wages arising from the contract with pilots that was ratified in March 2023. Another disappointing aspect of the quarterly earnings report was the 24% year-over-year decline in cargo revenue.
More than the above disappointments, it was the trimming of the 2024 earnings guidance due to supply-chain woes and economic uncertainty, which spooked investors. Management now expects 2024 adjusted earnings in the range of $6-$7 (projected to be above $7 previously). Supply chain disruptions are leading to high maintenance costs, which increased 13% and 23% in fourth-quarter 2023 and full-year 2023, respectively. Since DAL’s results generally serve as a harbinger of what to expect across the industry, its disappointing guidance and the resultant stock price depreciation caused other airlines to shed value on Friday.
DAL’s earnings guidance apart, the northward movement in oil price on Friday was a headwind for airline stocks, leading to their price depreciation. Oil price climbed nearly 1% on Friday to settle at $72.68 a barrel. The airstrikes carried out by the United States and the UK against Houthi targets in Yemen, in response to recent ship attacks in the Red Sea, resulted in an uptick in oil prices.
High Fuel & Labor Costs: A Bane for Airlines
The northward movement in oil prices is not a welcome development for airline stocks. This is because expenses on fuel represent a significant input cost for airlines. Therefore, an increase in fuel costs hurts bottom-line growth.
For example, oil price increased in third-quarter 2023, primarily due to the extension of production cut by Saudi Arabia and Russia through 2023-end. At UAL, average fuel price increased 10.3% sequentially in the September quarter. UAL expects the metric to be $3.28 in fourth-quarter 2023. UAL will release its fourth-quarter results on Jan 22.
At American Airlines, average fuel price increased 11% sequentially in third-quarter 2023 to $2.91 per gallon. The metric is expected to be in the $3.01-$3.11 band in fourth-quarter 2023. AAL will release its fourth-quarter results on Jan 25.
At the Dallas-based Southwest Airlines, economic fuel price per gallon in third-quarter 2023 was $2.78, up 6.9% from second-quarter 2023 levels. LUV forecasts fourth-quarter economic fuel cost per gallon in the $3 to $3.1 band. Like AAL, LUV too will release its fourth-quarter results on Jan 25.
Like Delta, labor costs are likely to have been high for other airlines too, in turn hurting bottom-line growth. With U.S. airlines grappling with labor shortage in the post-COVID-19 high-demand scenario, the bargaining power of various labor groups has naturally increased. As a result, we have seen pay-hike deals being inked in the space. This is resulting in a spike in labor costs.
For example, in August 2023, American Airlines pilots, represented by Allied Pilots Association, approved a four-year deal pertaining to wage increases. The approval makes AAL’s pilots eligible for an immediate pay raise in excess of 21% on average. Also, the deal includes provisions aimed at improving pilots’ quality of life. In September 2023, United Airlines’ pilot union ratified a $10 billion contract to increase their pay up to 40.2% over the four-year duration of the contract.